Financial Services

How Will Cryptocurrency Development Change the Banking Industry

Even though the world of cryptocurrency is growing and becoming more popular, traditional banks are still hesitant to use these digital assets because they think the risks they come with are greater than the potential benefits. But regulatory agencies like the Office of the Comptroller of the Currency (OCC) are trying to change how banks see digital currencies. They think that these assets could help banks move into a new era of efficiency and innovation.

 

Recently, the OCC sent out several letters that explain how traditional financial institutions can deal with digital currencies (or create services for them). This effort goes along with the OCC’s hope that more regulatory guidance will help banks feel more comfortable with these digital assets. At the beginning of January, the OCC said that national banks and federal savings associations can now make payments using public blockchains and stablecoins. This makes it possible for banks to handle payments much more quickly and without the help of a third party. Basically, this clarifying letter puts blockchain evolution networks in the same category as SWIFT, ACH, and FedWire. This makes it possible for these networks to be part of the larger banking ecosystem.

 

Banks might be wary of cryptocurrency because they might think that transactions involving these assets are riskier and require more time and money to check out. But banks and their customers can get a lot out of digital currencies if they are willing to take the plunge.

Why are banks wary of digital currencies?

According to a study done by the Association of Certified Anti-Money Laundering Specialists (ACAMS) and the Royal United Services Institute in the UK, almost 63 percent of respondents who work in the banking industry see cryptocurrency as a risk rather than an opportunity.

Decentralized Nature

Crypto assets were made as an alternative to traditional banking infrastructure. They don’t need a middleman and aren’t tied to the capacity of a central government, bank, or agency. In these kinds of transactions, instead of relying on centralized middlemen, people put their trust in the code of the blockchain and the fact that it is spread out.

 

Some banks don’t think they’ll be able to do well in this market because they think a central bank running a cryptocurrency would make it less valuable to begin with. Some people think that the fact that the currency isn’t controlled by a central bank makes them less important, or that they won’t be able to control the amount of money in circulation.

Worries about AML/KYC

Cryptocurrencies allow for peer-to-peer transactions without a regulated middleman. This means that the user can send money quickly and easily without having to pay fees. Instead of tying a transaction to a specific bank account through a financial institution, the ID of the transaction is linked to the transaction.

Many banks are worried about this kind of pseudonymity because there aren’t many rules about anti-money laundering (AML) and getting to know your customer (KYC) when it comes to digital currency transactions. For AML and KYC reasons, banks often think that cryptocurrency transactions can’t be tracked, which could lead to illegal activity and scams on the network.

Also Read Here: All About Cryptocurrency Exchanges And Its Different Types

Volatility

In their short history, the prices of cryptocurrencies, especially bitcoin, have been very volatile. There are many reasons for this, such as the size of the market, how liquid it is, and how many people are in it. Banks see this as a risk because the price hasn’t been stable in the past. Because of this, they think the currency might not be a good investment over time.

How banks can join the cryptocurrency business

Banks need to find a way to work with this technology instead of against it if they don’t want to be left behind. Adopting cryptocurrencies could streamline, improve, and upgrade financial services, and there have been a lot of changes in the industry recently that can make banks less worried about the risks and more aware of the benefits.

Services of Custody

In July, the OCC said that banks and savings and loan associations could offer crypto custody services to their customers. One of these services would be to hold the unique cryptographic keys that customers use to get into their private wallets. This means that the OCC thinks banks could hold either the cryptocurrency itself or the key to access cryptocurrency on a digital wallet for their customers in a safe and effective way.

Easy sign-up and help from experts

Banks could help new, less experienced investors get into the market by making tools that make it easier for their customers to use cryptocurrency. For example, people who are new to investing in cryptocurrency might not know how to set up their own wallet to store their own cryptocurrency. Instead of leaving their cryptocurrency “off exchange” or with a third party that is not regulated, they may find it easier and safer to keep it in a trusted financial institution.

Banks could offer crypto accounts that earn interest, and customers could invest the money or use other financial tools to do so. Banks could help investors who don’t know much about the ins and outs of crypto by acting as a trusted third party that’s respected in the finance industry and can keep investors’ assets safe.

Regulations on AML/KYC Administered

The Financial Crimes Enforcement Network (FinCEN) decided in 2019 that AML/KYC rules still apply to cryptocurrency transactions and custody services done through crypto entities that are considered money service businesses. This will help keep these platforms from being used for bad transactions, illegal activities, or scams. These rules could help banks and other large financial institutions do their homework on customers who do crypto transactions. This would make banks and other large financial institutions less worried about the risks that crypto transactions pose.

There is even a chance that AML and KYC checks could be done automatically with blockchain technology. Blockchain could make it easier for banks, loan officers, and other institutions to share information about people in a way that makes it easier to see. In other words, there could be one blockchain in the future that stores all customer information. Then, all financial institutions could use this blockchain data to quickly check up on their customers and spot any red flags that point to bad or illegal behavior.

Worries about safety

Banks can help people who own cryptocurrencies feel less worried about their security. Many holders worry about their personal wallets and cryptocurrency exchange development being hacked. Digital currencies could be safer from theft or hacking if they were kept in well-known banks. This would put clients’ minds at ease. Putting cryptocurrency under the watch of banks could help cut down on crime or give the impression to outsiders that cryptocurrency transactions aren’t safe.

Payments

According to the most recent letter from the OCC, banks can use public blockchains and stablecoins to speed up the way they make payments. Using blockchain technology to process transactions is faster and less expensive than using clearing houses. Banks could clear and settle transactions much faster if they used blockchain technology.

Smart Contracts 

When people use a smart contract to make a deal, they don’t have to trust each other as much because the success of the deal depends on computer code and not on how each person acts. Banks could increase this trust by becoming a reliable third party that uses these smart contracts for mortgages, business loans, letters of credit, and other transactions.

Trends in the Market

Here are just a few recent examples of the use of digital currency in the business world:

• Two cryptocurrency exchanges, Coinbase and Gemini, are now banking clients of JP Morgan. 
• Fidelity Digital Assets is a cryptocurrency fund.
• PayPal is now able to handle transactions with cryptocurrencies.

Conclusion

There aren’t many rules and guidelines for digital assets, so many financial institutions are hesitant to use them. Concerns about the security and stability of cryptocurrency also keep banks from getting involved in this area. However, banks shouldn’t be afraid of the risks of this technology; instead, they should be thinking about what it could do for them.

 

In a statement, acting Comptroller of the Currency Brian Brooks said, “Like other changes in technology in the past, there was a chance that criminals would use it.” “There’s also a lot of room for the economy to grow. So we don’t want to get rid of those benefits just because there might be crime. Instead, we want to give banks guidance on compliance to help them come up with new ideas.”

 

Financial institutions should also stop seeing cryptocurrency as a rival and start seeing it as a partner. Banks can actually play a big role in the crypto industry, giving the mostly unregulated industry a much-needed boost of security and confidence. By using cryptocurrencies and blockchain technology as a whole, banking can move to the next level of efficiency and innovation.